It can be challenging to know where to allocate your money. Many variables can change when it comes to deciding on how best to protect and grow your income. Here we take a look at a long-term strategy many people use to put themselves in a better position in the future: overpaying a mortgage.
APR V AER
Overpaying a mortgage can increase your equity in your home and mean that you pay less interest on your mortgage agreement. In short, you are reducing the term of your home loan which can bring many benefits. The main advantage of overpaying your mortgage is simple and underpins sound financial advice for the current economic landscape we live in: you can expect to pay more in interest on your debt than you'll make from interest on your savings and investments. For example, if your mortgage interest APR (Annual Payment Rate) is 3%, yet your current savings are accruing interest AER (Annual Earnings Rate) at 0.5%, in theory, you would be wise to pay down your mortgage. If you are thinking about overpaying a mortgage debt, it may not be as straightforward as the above example once you take into account your personal circumstances.
Any Other Debts?
If your mortgage interest rate is higher than your savings rate then overpaying your mortgage might be a wise decision. However, if you have other debts, more specifically any more expensive debt obligations, for example, if you have a credit card or a loan, or both, with a higher APR than your mortgage, you should try to prioritise repaying that debt first. This is about looking at your money long term and if you need money to invest now then this strategy may not be right for you. Like all money matters, what is right for one person may be entirely wrong for the next person.
Many mortgage providers will allow you to overpay up to a certain percentage of the loan each year, however, if you wanted to pay over that amount or pay off your mortgage altogether, you can expect to be hit with some form of exit-fee.
It could also be considered sensible to make sure you are in a relatively comfortable position before overpaying your mortgage. If you use up all of your available savings to pay down your mortgage would there be any money left in your savings pot? Should you ever lose your job or need to access money quickly this could be important for you and your family. It is also considered that three to six months' worth of bill and mortgage payments is a solid amount to have saved should such an unforeseen event arise.
You may have decided by now that overpaying your mortgage might be right for you. If you would like to discuss any option bespoke to your circumstances please give us a call on 01302 244 977.
Publish date: 25th February 2019